Tranching and Rating
Michael J. Brennan
University of California, Los Angeles (UCLA) - Finance Area
University of Konstanz - Department of Economics
University of Manchester - Business School
European Financial Management, Vol. 15, Issue 5, pp. 891-922, November 2009
In this paper we analyse the source and magnitude of marketing gains from selling structured debt securities at yields that reflect only their credit ratings, or specifically at yields on equivalently rated corporate bonds. We distinguish between credit ratings that are based on probabilities of default and ratings that are based on expected default losses. We show that subdividing a bond issued against given collateral into subordinated tranches can yield significant profits under the hypothesised pricing system. Increasing the systematic risk or reducing the total risk of the bond collateral increases the profits further. The marketing gain is generally increasing in the number of tranches and decreasing in the rating of the lowest rated tranche.
Number of Pages in PDF File: 32Accepted Paper Series
Date posted: October 21, 2009
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo5 in 0.610 seconds